Tuesday, June 08, 2010

Selling the Start-Up: How Antitrust Laws Can Kill Even the Smallest Deal

There is a special art to startup M&A. Those of you chasing the early exit should be forewarned: if your legal and professional advisors treat the sale of your startup like a typical small business sale, your problems can multiply.

What should a founder who sells his cool new social media tools business for, say, $5 million worry about? For one thing, the intervention of antitrust authorities. Increasingly, authorities are examining (and in some cases, undoing) small private company deals that have anti-competitive effects.

Corporate lawyers who don't specialize in tech consolidations might look at a $5 million price tag and rule out any antitrust concern, on the basis that competition laws in most jurisdictions are focussed on much larger transactions than the typical early high tech company exit. But your advisors need to look beyond pre-merger notification threshholds.

A start-up that has developed truly innovative or disruptive technology can dominate a market niche, or create an entirely new market altogether. If another player in that niche makes an offer, the result could be domination of a potentially huge market.

Consider last fall's $5 million sale by Diebold, Inc. of its money-losing voting machine division to Nebraska's Election Systems & Software. Despite the small purchase price, the result was a merged firm that controlled 70% of the market for voting systems. Fielding complaints from other competitors, among others, the US Department of Justice and nine states filed civil complaints. In March 2010, a settlement was reached which required the acquirer to sell all of the assets it purchased to another competitor, and to waive any rights to the business' employees. On May 19, a sale of the divested business to Dominion Voting Systems was announced. No price was disclosed.

Acquirors and sellers need to draw from this example (one of the uglier ones of many) and make sure that their advisors have all the facts when evaluating the impact of even the smallest sale.